Stock Options
Have you got a hidden liability?
The provision of shares to employees used to be exempt from operating tax via the PAYE system.
However, since
27 November 1996
, employers are required to withhold PAYE in relation to transfers of shares and the exercise of option granted on or after that date, if the shares are readily convertible to cash. (Normally these are shares quoted on a recognised stock exchange or for which trading arrangements are in existence or are likely to come into existence). These rules relate to Employee Share Purchase Plans and US Unapproved Share Option Plans, but not
UK
approved schemes.
In short, any gain on the exercise of options, is subject to
UK
income tax and both employees' and employers' National Insurance Contributions (for options granted on or after
6 April 1999
), and must be processed in the next payroll following the date of exercise. The gain is the difference between the exercise price, and the fair market value of the shares at that date.
Any further holding gains (i.e. where shares are held rather than being sold immediately) are then subject to Capital Gains Tax, which is accounted for by the employee (via Self Assessment Tax Return) and is not the responsibility of the employer.
If the employer does not recover the tax from the employee, the legislation imposes an obligation on the employer itself to pay the tax. In such situations, the employer is deemed to have provided a benefit to the employee equal to the value of the tax withheld, whether or not the tax is subsequently recovered. This may result in a significant amount of double taxation, as the employer would have an independent obligation to pay the tax itself in any event and the employee would be obliged to pay tax on the deemed benefit.
Also important is that share plans give employers the right to collect tax direct from employees if other earnings available during the period immediately after the exercise are insufficient to meet the withholding obligation (i.e. tax on gain on exercise exceed net pay).
Transfer Employer's NIC to Employee
For share options granted since
5 April 1999
, the employer may transfer the employer's NIC arising on gains to the employee. This may be done either by agreement, or by formal election.
The employee is given
UK
income tax relief on any employer's NIC paid by the employee, provided the payment is made on time. The tax relief is given by deducting the amount of contributions to be paid by the employee from the gain on the exercise of the options. |
